India’s currency, the rupee, dropped below the critical psychological threshold of 86 per US dollar on January13, hitting a new record low and lagging behind its regional counterparts. The decline of as much as 0.7%, the steepest since early 2023, brought the rupee to 86.5963. The slide in the rupee coincided with a 1.2% dip in the NSE Nifty 50 index, pushing local stocks to their lowest levels since June. Meanwhile, the 10-year bond yield rose by seven basis points to 6.85%.
The sharp fall of the rupee was largely driven by a stronger US dollar, bolstered by robust US jobs data that dampened expectations for further interest rate cuts by the Federal Reserve. In addition, rising oil prices further weighed on India’s sentiment, as the country remains a net oil importer.
This recent depreciation follows a string of record lows for the rupee, adding to existing pressures on the stock and bond markets. Indian equities have already been struggling due to slowing corporate earnings growth and ongoing capital outflows. So far this year, global investors have pulled around $2 billion from local stocks, with $705.5 million in fixed-income securities sold on January 8 alone.
Compounding these challenges, economists warn that a weaker currency, coupled with surging energy costs, could hinder the Reserve Bank of India’s (RBI) plans to ease borrowing costs in its upcoming policy review next month. “The falling rupee could be one of the crucial factors to stop them from a rate cut,” said Gaura Sengupta, Chief Economist at IDFC First Bank. “The decision on policy rates in February will be a close one.”
Standard Chartered recently pushed back its forecast for a 50-basis-point rate cut to the second quarter of the year, citing concerns over tight rupee liquidity.
Despite the rupee’s recent drop, it remains among the more stable currencies in Asia, thanks in part to the RBI’s consistent interventions to mitigate currency volatility. However, analysts warn that the rupee could slip further, with Gavekal Research predicting it may fall past the 90-per-dollar mark this year as the RBI moves away from maintaining the currency’s implicit quasi-peg to the dollar.
“All signs point to the central bank possibly allowing further weakness, as the economic challenges are substantial,” said Allan von Mehren, Chief Analyst at Danske Bank. “But I expect the RBI will intervene to slow the pace of depreciation.”
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